2016 pay forecasts ‘too optimistic’, predicts CIPD

The UK’s flexible labour market will continue to deliver solid employment growth in 2016, helping to contain skills shortages and wage inflation, despite the introduction of the National Living Wage, according to Mark Beatson, chief economist for the CIPD. However, Beatson said the UK’s economic growth will only be sustainable if more is done to raise productivity in the workplace, with the introduction of an Apprenticeship Levy for large employers in 2017 unlikely to achieve this on its own.

In his annual analysis of the UK labour market for the CIPD, the professional body for HR and people development, Beatson predicts:

• Employment may again grow by as much as half a million in 2016, greater than the forecast for employment growth of 400,000 made by the independent Office for Budget Responsibility (OBR) at the time of the Autumn Statement

• Wage growth will remain at around 2% for most or all of 2016, which is significantly below the forecasts from the Bank of England and the OBR for average earnings growth of about 3.5%, but low inflation means most workers will still feel better off

• Skills shortages are unlikely to pose a major problem to most employers

On employment, Beatson commented, “Last year we predicted that employment would increase by up to half a million during 2015, which it did. This year I think we will see a repeat, with another half million additional jobs. If the Government provides the right support for those out of work, we may have the opportunity to reduce the unemployment rate to below 5%, a rate we haven’t seen since 2005.

“Should this happen, the tightening labour market will likely see many economic forecasting models start flashing amber or red amidst warnings of skill shortages and higher wages pushing up costs and prices. However, shortages of skilled labour are not having any noticeable effect on economic growth, except for a few very specific sectors, such as construction. This is because our research shows that most employers remain confident about recruitment going into 2016 and most say they have a choice of suitable candidates for most positions. With record levels of net migration into the UK increasing the supply of labour, it doesn’t look like we’re going to see a skills crunch any time soon.”

On pay, Beatson said, “There are several reasons why employers might be nervous heading into 2016. Some are worried how they will pay for the National Living Wage, especially those in retail, hospitality and social care. Larger businesses will also have to pay the Apprenticeship Levy from April 2017, while many businesses with fewer than 30 employees will have to pay additional pension costs during 2016 as auto-enrolment is rolled out further. With inflation close to zero, some employers will try to manage these costs by restricting pay rises for their better-paid employees.

“Despite these challenges, the Bank of England and OBR both expect average earnings to grow by about 3.5% in 2016, but these forecasts seem very optimistic. The introduction of the National Living Wage in April might push up the official figures for average earnings, but this is likely to be a temporary effect as these other cost increases in the pipeline will potentially restrict the ability of employers to afford significant pay rises. Our research shows pay expectations for the year ahead centred on a 2% increase, although with inflation expected to average 1% in 2016, most private sector employees will still see the value of their salary increase.”

On productivity, Beatson stateds, “Although the Government sees the introduction of the Apprenticeship Levy as a means to encourage more employers to invest in developing their workforce and boost productivity, there are real question marks over whether the Levy will help improve the quality of apprenticeship programmes, which is as least as important as boosting overall numbers. Investment in leadership and line management capability is integral to getting the best out of people, and apprenticeships will have little impact on addressing this key skills deficit. While we now have seen two quarters of productivity growth, there’s clearly still work to be done to make this sustainable, which is the only way of delivering improved living standards in the longer term.

“As a first step we need a fundamental review of skills policy to shed light on how the skills system as a whole currently operates and what changes are needed. The landscape has changed massively since the last major review of skills policy in 2006, and policy makers at national and local levels need to be working together if we are to see meaningful progress in addressing our skills and productivity deficits.”

Beatson also predicts a more positive year for the public sector, following the Autumn Statement which showed more modest job losses than expected. He comments: “While the public sector will still see redundancies, they will likely be less than widely feared. Nevertheless, public sector employers will find the 1% pay ceiling limits their ability to recruit and retain their most in-demand workers.”